Telcos try to keep up with tech

SBC Communications' purchase of Concentric Network marks another telecommunications giant reaching out for Internet expertise.

4 min read
When SBC Communications bought a stake in Concentric Network today, it marked another telecommunications giant reaching out for Internet expertise.

SBC took a 4 percent stake in the business IP network company to help expand its business services division. But more than simply adding additional corporate services, the deal underscores what analysts have called the culture change that is taking place within telcos as they battle with cable companies and ISPs for future control of data services.

Many telecommunications companies are broadening their services by taking a stake in or buying outright other companies, as technologies such as Internet telephony, DSL, and Virtual Private Networks gain in popularity.

When Congress deregulated the telecom industry, pro-competition forces celebrated the day as the first in a new era for the consumer--one in which users could get all their telecommunications services from a single provider and at cheaper rates. With miles and miles of copper wire and fiber optic networks already in place, giant well-heeled telcos seemed poised to dominate the data services market, which includes Internet access.

But that promise has been slow to materialize.

"The competencies required to provide data services are very different from the competencies needed to provide traditional voice services," said Abhi Chaki, senior analyst at research firm Jupiter Communications. "They're clueless at marketing these services, pricing the services, and attracting customers because they've never done this before. They've been selling voice for years."

Many regional phone companies, which thrived for so many years in the relative isolation of a regulated-monopoly environment, simply did not have the marketing know-how or competitive experience to effectively wrest Net users away from other ISPs. And now that many cable companies have entered the market with promises of faster Internet access and on-demand entertainment, the playing field has become more crowded than ever.

Phone companies including MCI Internet and Sprint began offering discounted Net access to users who buy more than one service, such as long-distance, Internet, and wireless communications. AT&T also offered up to five free hours of Net access to its long distance customers for a limited time.

Despite such incentive programs, some telecommunications companies faced criticism for their service and pricing policies when they first started marketing new technologies such as ISDN.

The inability of the telcos to become clear-cut Internet leaders and their distraction with efforts to focus simultaneously on many different services aside from Net access--among them cellular and PCS paging--has led them to make a series of acquisitions and investments in companies that know how to deliver what their customers want.

"I think [telcos are] saying we need to learn [the Internet] faster than we have and maybe it's time to look outside the nest to service innovators as opposed to building it here," said David Cooperstein, senior analyst at Forrester Research. "In the last six to 12 months they're beginning to realize the Internet is actually a window into selling new services."

In February, Sprint and national ISP EarthLink announced that they would combine their Internet units in a $230 million joint venture that would give Sprint a 30 percent stake in EarthLink.

"The EarthLink deal was an admission by Sprint that they just didn't understand how to provide data services to the consumer," Chaki said.

In assessing the SBC-Concentric deal, Chaki added: "SBC is pretty strong on providing communications and they have the pipe. But what to do once the pipe is in the customer's home or office is something that these guys don't know."

Other analysts said SBC's stake in Concentric offers an indication that the telco industry is learning new tricks.

"The idea that I don't have to own it to sell it is really new for telecom retailing," Cooperstein said. "I think they're trying to move up the value chain by adding email hosting, e-commerce solutions, and other specific solutions that add value and lock in customers."

Analysts have said also that companies such as AT&T, Sprint, and regional phone companies were late to the game, basically allowing America Online and other Net access providers to take the lead.

But the telecommunications industry in general still faces some regulatory hurdles that have hampered its ability to grow and move quickly. The merger between WorldCom and MCI, for example, faced stiff regulatory scrutiny that ultimately forced MCI to sell its Internet business.

Complicating matters further is the fact that the industry is ever-changing, which forces telecommunications companies to try and formulate a sound business plan even as new technologies with the potential to change the landscape dramatically are coming of age.

Analysts say the future of data services will include Net access, electronic software distribution, multiplayer gaming, IP telephony, and video-on-demand services, just to name a few. The most likely to succeed in the data services space going forward, they said, will be the companies that can provide most of the services consumers want at the cheapest prices.

Said Jupiter's Chaki: "That's why we see such confusion in where they make their investments, because it's a moving target."